White House assures that the economy isn’t in recession and isn’t headed there. Wall Street thinks there is no recession at the moment, but they aren’t optimistic about the future.
The data show that the picture is nuanced. Despite the rumours, there’s no recession right now. Although the jobs market remains strong, manufacturing is slowing, but it is expanding. Consumers still have plenty of cash and seem to be in good shape. somewhat less willing to part with itThese days.
The second quarter GDP data is due out Thursday. It will raise questions about whether it’s a slower economy after an extremely strong 2021 year or if there are deeper repercussions.
Treasury Secretary: “This economy isn’t in recession but it’s in transition, in which growth slows.” Janet YellenAccording to Sunday’s “Meet the Press”, A recession is an economic contraction with broad effects that impacts many areas of the economy. This is not the case.
Kevin Hassett (head of the National Economic Council in the Trump Administration) disputed that view Monday and claimed the White House had made a mistake not admitting to the facts of the present.
“We are… in recession,” Hassett said. So, it’s difficult,” Hassett said to Andrew Ross Sorkin, a senior fellow at Hoover Institution.Squawk Box” interview.
He said, “In this instance, if I was in the White House, I wouldn’t be out there sorting of denial it’s recession,”
Two negative quarters
At the very least, there is a decent chance that the economy will succeed. the rule-of-thumb recession definitionTwo consecutive quarters of negative GDP figures. Gross domestic product declined 1.6% in the first quarter. An Atlanta Federal Reserve gauge suggests that it will drop to the same level by the end of the second quarter.
Wall Street is however seeing the situation differently. Multiple economists including Nomura and Deutsche Bank see a future recession, but the consensus GDP forecast is for a gain of 1 percent, according Dow Jones.
Consumers will decide whether the U.S. avoids recession. They accounted for 68% in all of the economic activity during the first quarter.
However, recent indicators suggest that consumption has slowed in the period April-to June. Actual (after-inflation), personal consumption expenditures declined 0.1% in MayAfter an increase of 0.2% during the first quarter, real spending fell by just 0.2%. Real spending actually fell in the first quarter of this year. This is due to inflation at 0.2%. its hottest pace in more than 40 years.
The U.S. economy is most at risk right now because of consumer inflation.
Although President Joe Biden has focused on the decline in fuel prices recently, signs point to inflation expanding beyond groceries and gasoline.
Actually, Atlanta Fed’s “sticky” consumer price index (which measures products whose prices don’t fluctuate much) has been increasing at an alarming rate.
The one-month annualized Sticky CPI — think personal care products, alcoholic beverages and auto maintenance — ran at an 8.1% annualized pace in June, or a 5.6% 12-month rate. CPI flexible, which measures vehicle prices and gasoline, rose at an astonishing 41.5% annualized rate and an 18.7% increase year-over-year.
The argument that inflation will drop if the economy switches back to higher consumption of services rather than goods is flawed. It also seems to be a weak link in the release of overtaxed supply chain pressures. According to Fed data, services spending was responsible for 69% of consumer expenditures in 2019 and 65% in 2019. The shift is not that dramatic.
If inflation continues at high levels, it will cause the largest recession, namely Federal Reserve interest rate hikesThey have already reached 1.5 percentage points by 2022, and may double this year. On Tuesday and Wednesday, the Federal Open Market Committee will meet to set rates and approve an additional 0.75 percentage points.
Fed tightening of monetary policy is creating jitters on Wall Street. Stocks have been selling off for most of the year. Main Street has seen skyrocketing stock prices. Higher prices are causing concern among corporate executives, who warn that cutbacks could occur. This is despite the fact that the employment picture has been the main support for people who believe a recession will not be coming.
Traders believe that the Fed will continue to hike its benchmark rate and bring the Fed funds level down to between 3.25%-3.5% by year’s end. Futures pricing indicates the central bank then will begin cutting by the summer of 2023 — a phenomenon that wouldn’t be uncommon as history shows policymakers usually start reversing course less than a year after their last move.
The tighter policies for 2022 have been noticed by the markets and they have begun pricing with a greater risk of recession.
Goldman Sachs economists wrote in a client letter that: “The Fed will deliver more significant increases and slow down sharply the economy, the more likely the price for inflation control is to be recession.” CPI inflation surprises persisting in the economy clearly raises those risks. It worsens growth-inflation tradeoffs, which is why the market worries more about a Fed-induced recession.
Positively, Goldman’s team stated that the market could have priced in inflation risk too high, but it would need to be convincing that the prices have peaked.
Even though financial markets are still in recession, especially fixed-income ones, they continue to point towards it.
The 2 year Treasury yield rose to above the 10 year note in July and has maintained that position ever since. Inverted yield curves are a reliable indicator of recession for over a decade.
But the Fed is more concerned with the relationship of the 3-month and 10-year yields. The curve is not yet inverted, however, at 0.28 percent as Friday closes, it was flatter than ever since March 2020’s Covid pandemic.
As growth prospects dwindle, the Fed will continue to tighten the Fed rate.
The Goldman team stated that “given the delay between policy tightening, inflation relief, it too increases the chance that that policy is too tightening, just like it contributed to risks that policy wasn’t slow enough to tighten when inflation rose in 2021.”
The main resistance to recession is the economy. the jobs marketAlso, wobbling.
Weekly jobless claims recently topped 250,000 for the first timeThis could indicate that the number of layoffs has increased since November 2021. The July numbers can be noisy due to auto plant layoffs, Independence Day, and other factors. However, there are many indicators such as multiple manufacturing survey that indicate that hiring is declining.
Chicago Fed National Activity IndexFor the second month straight,, which includes many numbers, went negative in July. According to The Philadelphia Fed’s manufacturing indexThe reading was -12.3, which represents the percent difference between companies who report expansion and contraction. It is the lowest reading since May 2020.
A full-scale recession will only be possible if the job picture is not strong and as consumer spending slows down and investment falls, it won’t matter if the employment situation doesn’t improve.
Wall Street has an old saying that the job market will be the first to notice a recession. Bank of America predicts the unemployment rate at 4.6% in the coming year.
Hassett said that the current Trump administration economist stated, “On the labour market, we are basically in a regular recession.” It’s not a valid argument to say that the labor market has been tightening while the rest of America is healthy. The argument is based on ignoring history.
